Tesla’s battery business is booming amid Model 3 struggles

Mark Jacobson, a Stanford professor who specializes in renewable power, displays his Tesla vehicles and power grid.

Photo: Jessica Christian / The Chronicle

Image 2 of 4

Jacobson charges his Tesla in the garage of his Stanford home. He’s compensated for the electricity he exports to the grid, so he’s able to zero out his utility bill.

Photo: Jessica Christian / The Chronicle

Image 3 of 4

Jacobson shows his Tesla power grid.

Photo: Photos By Jessica Christian / The Chronicle

Image 4 of 4

A Tesla home power grid is mounted on the wall of Jacobson’s garage.

For the past year, Tesla watchers have obsessed over the Palo Alto automaker’s struggles to build its Model 3 electric sedan and CEO Elon Musk’s erratic behavior — most recently appearing to smoke pot on a podcast.

Quietly, another element of Tesla’s business has been booming.

Deployment of Tesla’s stationary batteries — designed to supply electricity to homes, businesses or the power grid — surged 450 percent during the first half of 2018, according to the company.

Tesla has now installed enough batteries worldwide — from Australia to Vermont — to store 1 gigawatt hour of electricity, roughly the output of one commercial nuclear reactor running for one hour. The company expects to double that amount in the next nine to 12 months.

Even so, some homeowners have complained that the company — not known for hitting production deadlines — has pushed back installation timelines, even into 2019. On the Tesla Motors Club, an online discussion forum not sponsored by the company, one participant fumed in August about waiting 18 months after putting down a $500 deposit.

Related Stories

“The sad truth is, we all give our $500 to Tesla for more than a year (some are closing to 2 years), and we are not incurring any interest that we ‘loan’ to Tesla!” wrote the participant, who posts under the handle kc_moses from Lake Worth, Fla. “The more I look at it, the more I hated Tesla.”

Production of the Model 3 may be getting in the way. The car, considered the linchpin of Tesla’s plans to become a mass-market automaker, has hogged the lithium-ion battery cells made at the company’s Nevada Gigafactory.

“We’re kind of cell-starved for Powerwall right now,” Musk acknowledged in a July conference call with financial analysts, referring to the brand name for Tesla’s batteries.

The company’s website now warns prospective buyers of the $5,900 Powerwall that any new orders won’t be filled until “late 2018,” at the earliest.

Tesla’s chief technology officer, J.B. Straubel, said battery production should catch up early next year.

“The residential market is going crazy, and the demand is more than we can keep up with right now,” he said. “We’re scaling production as fast as we can, and still there are delays.”

At the same time, Tesla has been aggressively courting utility companies interested in major battery installations.

In June, it landed a contract with Pacific Gas and Electric Co. to install enough of its industrial-size Powerpack batteries in Moss Landing (Monterey County) to store 730 megawatt hours of electricity. And in May, Tesla announced a deal with Green Mountain Energy in Vermont to use both Powerpack installations and up to 2,000 home-based Powerwalls to create a kind of virtual power plant, connecting the batteries and using them to supply electricity to the grid when needed.

Utilities see in batteries the potential to replace inefficient “peaker” power plants — facilities that generate power only when electricity demand on the grid is highest. That’s particularly true in California, which is trying to slash the greenhouse gas emissions that come from burning fossil fuels.

“I think what we’ll see is we won’t build many new peaker plants, if any,” Straubel said. “Already what we’re seeing happening is the number of new ones being commissioned is drastically lower, and batteries are already outcompeting natural gas peaker plants.”

The potential market is huge. A study from GTM Research estimates that sales of energy storage products in the United States — including the residential and utility markets — will hit $541 million this year, pass $1 billion in 2019 and reach $4.6 billion in 2023.

Other countries are showing an interest. Although North America represents about 30 percent of the global energy storage market, according to Navigant Research, installations are growing in Asia, particularly South Korea and Japan.

“Both of those countries don’t have their own fossil fuel businesses,” said Alex Eller, a senior analyst with Navigant Research. “So you’re reducing the amount you’re relying on those imported fuels.”

Tesla faces plenty of competition, from such companies as NextEra Energy, E.on of Germany, and Fluence, a new joint venture of Siemens and AES Corp. Most use similar lithium-ion battery cells, Eller said,

“The hardware side of it, I would say, is definitely getting commoditized,” he said.

The companies differentiate themselves more through their software that operates the batteries. The batteries, after all, can be used for a number of services that require different operations, from storing solar power to helping stabilize the grid.

“Shifting solar might be relatively simple, but there are projects that might provide a number of services,” Eller said. “So the software’s really going to be key.”

The residential market, meanwhile, is largely driven by the desire of homeowners to make the most of their rooftop solar panels.

Stanford University Professor Mark Jacobson uses two Powerwalls — operating since June 2017 — to store electricity from a 13.6-kilowatt solar array atop his home on the school’s campus. The batteries are usually charged by 10 or 11 a.m., he said. After that, any excess electricity the panels generate gets fed back to the grid.

In the evening, Jacobson uses the batteries to power his house, which contains only electric appliances — no natural gas. The home draws electricity from the grid between 11 p.m. and the morning. Because he gets compensated for the electricity he exports to the grid during the day, he’s able to zero out his utility bill.

Although the rooftop array and the batteries, together, cost more than $60,000 up front, before state and federal incentives are factored in, Jacobson figures he’ll recoup the money in five years. Oh, and he drives an electric Tesla Model S.

“Once you’ve figured it out, it’s foolish not to do,” said Jacobson, who has modeled how California can get all of its energy from renewable sources. “I have no electricity bill, I have no gas bill, I have no gasoline bill.”

Tesla does not reveal precisely how much it makes from its batteries.

Instead, the company lumps battery revenue together with income from its solar business, formerly known as SolarCity. For the first half of 2018, that combined revenue rose to $784.4 million, up 56.7 percent from the first two quarters of last year. Tesla’s solar installations have slowed over the past year, meaning growth in the company’s energy division revenue comes from batteries.

The growth hasn’t been smooth. Tesla’s battery deployments fell 45.6 percent from the first to second quarter this year. In part, the first-quarter total was inflated by the completion of a large project in South Australia. But the company’s decision to prioritize ramping up Model 3 production also probably played a role.

In its most recent quarterly update to shareholders, Tesla acknowledged the backlog of battery orders, saying “demand for our energy storage products remains significantly above our production rate even as we gradually add capacity.”

Straubel sees the residential energy storage market growing just as quickly as the utility business. The company does not disclose what percentage of its battery installations go to residential customers versus utilities.

He said that rumors the company had stopped making or installing Powerwalls altogether were not true.

“We are definitely still building Powerwalls and deploying them,” Straubel said.